Institutional Investors Increasingly Using OTC to Avoid Crypto Exchange Limits

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Institutional investors are choosing over-the-counter (OTC) markets over standard exchanges to enter the bitcoin space, revealed Forbes.

An OTC market executes trades via a private dealer network as opposed to a formal exchange in which counter parties expose their offers to the party in public. That allows big investors to purchase a large number of assets without alerting the market. Bitcoin, whose supply is relatively limited, and is available across the online exchanges, thus becomes an ideal candidate to be listed on OTC markets.

Major Bitcoin Deals Go OTC

An investor willing to put a multi-million dollar’s worth of investments into crypto space cannot just sign up at a random exchange and do it. Online Bitcoin exchanges lack the infrastructure, liquidity, and technology to execute large block orders. Coinbase, for instance, allows traders to purchase only $25k worth of cryptocurrencies every day regardless of being one of the world’s leading crypto exchanges.

The limits are visible all across the formal exchanges. US-based Kraken exchange allows withdrawals between $2,500 per day and $20,000 per month. Another US exchange Circle imposes a withdrawal limit of up to $3,000 per week. Other high volumes crypto exchanges like Binance are purely crypto-to-crypto. Therefore, their liquidity options come in the form of stablecoins, which again is a risky alternative to institutional traders.

“The big deals have to go OTC. A lot of the exchanges limit the order size, so you have to break up your orders, and that’s just fatal,” explained Monica Summerville, director of fintech research at UK-based Tabb Group, to Forbes.

OTC Volumes Outpacing Standard Exchanges

Summerville authored a report in April that revealed that OTC market volume had crossed $12 billion globally. She found that the OTC figures were two-to-three times larger than that of standard crypto exchanges. Nevertheless, many of these formal exchanges are believed to have manipulated their volumes in the absence of minimal regulations. Therefore, the true nature of these volume figures cannot be verified.

The OTC figures, though not visible on the Bitcoin blockchain, appears to include other crypto assets as well.

“Our reports are based on interviews and with participants in markets, cover more than BTC and keep in mind that not all transactions show up on public blockchains as many venues omnibus accounts so only net changes to their positions will be written to the public blockchain,” Summerville explained.

The Other OTC Issues, Meanwhile

While institutional investors continue to flock in crypto space via OTC markets, as evident by the growing volumes, a lack of robust infrastructure also makes it an uncomfortable – and often risky – experience as a whole.

Frank Wagner, the founding partner of INVAO, an AI-enabled investment firm, said that institutional investors and Bitcoin dealers are setting up trades over Skype or Telegram channels, which is not exactly a secure and effective way.

“It may be a reason that many institutional investors are deterred from getting involved,” he explained.

The crypto OTC markets also bring unique counter-party risks to the table, mainly related to compliance. Anti-money laundering rules, for instance, turn away serious money from getting into the crypto space. Many financial institutions do not believe in dealing under the grey area of crypto laws, especially when they would be transferring a large amount of cash/fiat via regulated banking corridors.

Then, there are counter-party risks related to fraud. A dealer might default before he delivers the token to his client when the fiat deposit process has already initiated. Since the deal doesn’t happen in real time, insolvency poses as the most significant risk factor in crypto OTC trades.

OTC Distrust Solutions

Serious players in the investment market are attempting to solve the OTC distrust by rolling out services that mitigate the counter-party risks. Just last week, Fidelity, a renowned asset management firm, ventured into crypto custodianship services for institutional investors. They would do so by providing a software solution that mirrors settlement, trading, and risk management systems for the crypto OTC space.

OTCXN, a Silicon Valley blockchain startup, is also building solutions in the form of a multi-custodian network platform. It would connect liquidity providers and exchanges with the minimal counter-party and settlement risk using an institutional grade Layer-2 network. Caspian, another platform in-making, is creating sophisticated tools for institutional investors so they can connect to multiple exchanges via a single user interface.

Overall, the ecosystem around the Bitcoin OTC space is gearing up for explosive growth with investment and solutions going hand-in-hand.